Analysis & Opinion

BERLIN (Reuters) - Germany's export-driven economy appears to have entered a mild recession in the final months of 2011, hit by weaker world trade and a rapid loss in confidence due to the euro zone debt crisis, the Organization for Economic Co-operation and Development (OECD) said on Monday.

The OECD expected Europe's largest economy to grow by 3.0 percent this year, followed by a modest 0.6 percent the next as exports fall and domestic firms become more hesitant to invest. In 2013, it forecast growth of 1.9 percent.

"The economy is facing a period of weakness reflecting a worldwide loss of confidence and lower world trade growth, which usually hits Germany more than others through weaker exports and investment," the OECD said in its twice-yearly Economic Outlook.

That was a more pessimistic view than that of Chancellor Angela Merkel's government, which last month slashed its forecast for growth next year to one percent from a previous 1.8 percent due to dampened expectations for exports.

"Real GDP returned to its pre-crisis level in the second quarter, but the economy appears to have entered a mild recession in the fourth quarter," the OECD said. "It has been hit by a marked deterioration of world trade and by a rapid loss in confidence related to the sovereign debt crisis in some euro area countries."

The OECD expected economic activity to recover gradually next year as uncertainty would decline and trade pick up.

"The recovery .. is likely to be stronger than in other euro area countries because in Germany there is no need for deleveraging in either the household or corporate sectors." the OECD said.

The main risks were a deeper slowdown in global trade and a substantial deterioration in German bank's balance sheets due to the euro bloc crisis, which might lead to sustained problems in credit availability, particularly for domestic spending.

A successful crisis resolution in combination with better regulated financial markets could unleash a longer and stronger upswing, but the overall risks were predominantly on the downside, the OECD said.

If conditions worsened significantly, Berlin should take temporary actions to boost demand, the OECD said, suggesting short-time work arrangements. It also advised Berlin to ease regulation in the services sector and review taxation.

"To support growth, the structure of taxation should be reviewed, and the burden shifted to immobile bases, including environmentally harmful activities, and away from mobile ones, notably labor, which is particularly highly taxed."